Absolute return investing: The long and short of it with Mark Swain

Mark Swain, Partner, Fund Manager, Smith & Williamson Enterprise Fund, discusses the exploiting potential due to Brexit, why he is sticking to the UK instead of widening the investment remit, and whether he will be dialing up metrics post Brexit.

PRESENTER: Well joining me now is Mark Swain from Smith & Williamson. So, Mark, absolute return funds, they haven’t exactly set the world on fire. But the opportunity set in the UK around Brexit, it must offer some potential for some decent returns in the coming months, so how are you set to exploit this?

MARK SWAIN: So Brexit’s not only left the UK equity market trading at a 30% discount to its global peers, what’s really interesting is the divergence of valuations within the UK market. So UK domestics, those that earn revenues in GBP, have underperformed the UK international stocks, those with overseas revenues, by 25%. This creates a huge opportunity for long/shorts to exploit these opportunities, given that the UK market appears to be pricing in the worst case scenario, which is a no deal Brexit.

PRESENTER: Now, other funds have widened their investment remit, why do you think they’ve done this, and why are you sticking to the UK when other people are losing their nerve and moving to more exciting climates?

MARK SWAIN: So remits usually widen when assets grow to such a size that liquidity and ownership limits become a bit of a constraint. So they tend to look at other markets. Now the risk with this is that it moves the manager up the market cap scale, or into new markets away from the sweet spot of their expertise. The UK market is a very diverse market in terms of industries and geographical revenues, so there’s plenty of opportunities there. Our track record has been built on our in-depth knowledge of the companies in our home market, and so we have absolutely no intention of going overseas and potentially diluting our returns.

PRESENTER: So what sort of returns can we expect going forwards?

MARK SWAIN: We target LIBOR plus 4%, which is what we’ve achieved since 1998 when the fund was launched, and this is through several economic cycles.

PRESENTER: And simple funds that are not taking on big macro and factor bets, do they still have a place?

MARK SWAIN: Yes they do. Taking on big macro bets entails a lot of risk, and that’s not always appropriate for investors that want a consistent return with low volatility. And the beauty of long/short funds is that you can hedge out this factor risk while still monetising the operational performances of the companies. And the other thing with long/short funds is they are very easy to understand and explain to clients, and they can provide full transparency, which is not something you can say for all of the more complex black box type strategies.

PRESENTER: So, finally, will you be dialling up the risk metrics post-Brexit outcome, and are you sticking to your growth mandate with a long book?

MARK SWAIN: So once a Brexit outcome is known, then it can be priced with more certainty and you can take positions with a greater conviction. So at that point we would dial up the growth through a combination of more positions and bigger position sizes. As for the growth mandate in the long book, the P/E metric on our long book is about 13 times and on the short book it’s 12 times, so relatively well balanced, but there is a slight growth bias in the long book, and that really reflects the superior earnings growth in our longs versus the more challenged business models in our shorts.